In recent years, the economic downturn and the practice of mortgage securitization converged, spawning all sorts of novel legal questions. Among those is whether a homeowner can sue an entity that foreclosed on her home but did not have proper legal title to the underlying mortgage. Last month, in a closely-watched decision, the California Supreme Court said “yes.” Lower courts will spend years, if not decades, deciphering the ruling’s implications.
In the case, Yvanova v. New Century Mortgage Corporation, the homeowner defaulted on her mortgage, and her residence was sold as part of a non-judicial foreclosure proceeding. Before that, the mortgage had been bundled into an investment security and assigned several times to various trusts. In her lawsuit, the borrower alleged that the transfers were invalid for two reasons; the original lender had filed for bankruptcy and the first assignment occurred after the original trust was barred from accepting new mortgages. Because neither circumstance is unusual in the mortgage industry, lenders were understandably concerned about possible ramifications of the lawsuit.
The California high court held that the borrower can sue the foreclosing entity but only if she alleges that the transfer to that company was void, rather than voidable. The difference is that a void transfer has no legal effect, while a voidable transfer suffers from one or more curable defects.
As other commentators have noted, the court repeatedly stressed that its ruling is narrow, and it did not reach a host of important, related issues, including: (1) What damage would a defaulting borrower have from a foreclosure that, as a practical reality, was inevitable? and (2) Can a homeowner invoke an allegedly void transfer as grounds for delaying or blocking non-judicial foreclosure proceedings, as opposed to suing for money damages in a subsequent legal action? On the first question, a strong argument can be made that the borrower incurred no compensable injury and the real “victim” was the lender that had legal title to the mortgage but lost the foreclosure proceeds to a putative assignee.
In any event, Yvanova opens the door to waves of new litigation that eager plaintiffs’ attorneys will seek to exploit.